Critical Issues in Credit from a CCRO Participant’s Perspective Robert D. (Bob) Stibolt Senior Vice President, Strategy, Portfolio & Risk Management, Tractebel North America

2 Background Information on Tractebel Energy division of Suez with operations in over 100 countries on 5 continents Over 100,000 employees World’s 5th largest Independent Power Producer with generating capacity of more than 50,000 MW worldwide Gas transport networks with a capacity close to 100 Gm³ on 3 continents Annual sales of about 207 Twh of power, 33 Gm³ gas, 110 million tons of steam, … Founding member in North America of Committee of Chief Risk Officers and co-chair of Credit Working Group

3 Industry Risk Management Best Practices Committee of Chief Risk Officers Phase I working groups and white papers  Risk Valuation and Metrics  Credit Risk Management  Governance  Energy Trading and Marketing Disclosures Phase II working groups and white papers  Market Price Indices  Capital Adequacy

Example: Benefits of Multilateral Netting

5 Without multilateral netting, the total guaranty (credit) exposure is $172 MM. A BC D E (3,1) (7,3) (30,2) (4,5) (13,1) (8,1) (6,0.7) (17,8) (44,2) (39,4) Key ($ millions) (MTM Position, 1 Day VaR) Guaranty Exposure ($ millions) $30 $12 $37 $44 $49 $172 A B C D E Total

6 In this case, multilateral netting reduces the guaranty (credit) exposure by 88%. A B -7 C -2.5 D E +4.4 (3,1) (7,3) (30,2) (4,5) (13,1) (8,1) (6,0.7) (17,8) (44,2) (39,4) Key ($ millions) (MTM Position, 1 Day VaR) How well might the netting pool perform over a wide range of MTM scenarios? Reduction $172 - $20.7 =$151, or 88%. Guaranty Exposure ($ millions) $16.3 -$6.9 -$2.5 -$11.4 $4.4 $20.7 A B C D E Total

7 Multilateral netting significantly reduces guaranty (credit) exposure over a wide range of scenarios. Guaranty (Credit) Exposure for Bilateral and Multilateral Netting Probability Multilateral Netting Bilateral Netting Guaranty Exposure Multilateral netting reduces the average exposure, as well as the variance in the exposure.

8 The need for credit risk capital is reduced according to the Tractebel simulation by at least 75% Benefit of Multilateral Netting %75%80%85%90%95%100% Guaranty Exposure Reduction Probability of Exceeding

9 The Role of the Regulator Assure that clearing solutions are adequately capitalized and that their risk structure is transparent to all market participants  Adequacy of financial safeguards is critical as credit risk becomes concentrated within the clearinghouse – failure is not an option  Market participants need to be fully and openly informed about the legal structure of the mechanisms protecting them Assure the broadest possible access to clearing solutions  Increases number of market participants, market competitiveness, and liquidity Assure reasonable pricing for clearing services offered  Clearinghouses entail an element of natural monopoly in that the benefits scale up with market share  Non-profit open access structure or regulation of returns on capital are alternatives